Greek Debt Crisis Finally Over? Maybe Not.

The world’s grown accustomed to bouncing from crisis to crisis, like passengers in a car where the transmission keeps slipping and the vehicle keeps jerking. One day it’s Greece, then Portugal, then US. debt, then the lack of jobs. You know the drill. The weird thing about this jerky ride is that what we face at each lurch is not a new crisis but a return of the same crisis—that being the global debt crisis—with a new headline. Something gets bad, the media jumps on it, politicians call press conferences to announce new initiatives, then it fades from the front page only to re-emerge weeks or months later in a slightly different form. Greece is one part of the crisis and while it has faded from the headlines, its debt problem hasn’t faded. Carl Weinberg at High Frequency Economics spends a lot of time probing the debt crisis, which even if not in the headlines still weighs heavily on the global investor psyche. His latest report on Greece is a sharp reminder of why the worry persists. Greece, as we all remember, hit the wall on debt and was leaning toward sovereign default when the world came to its rescue. The world in this case is the IMF and the EU central bank which offered Greece emergency loans in return for meaningful reforms. Greece implemented some reforms and the loans started flowing. The problem, as Weinberg sees it, is not that Greece is getting aid but that the aid is in the form of debt, the very stuff that got country in trouble and the very stuff that is causing investors around the world to be so risk averse.

The numbers are jarring. As Weinberg points out, when Greece entered its financial crisis it’s debt was 113% of GDP. Now having received the first infusions of IMF aid its debt is headed to 130% of GDP, and by the time Greece finishes with its financial makeover in 2013, thanks to all this aid, its debt will be 149% of GDP. Even that, HFE notes, is an optimistic scenario. Citing analysis by the IMF staff, HFE notes that higher interest rates, slower economic growth or higher inflation could raise that ratio to nearly 180% of GDP. Here is HFE’s reasonable question about where this will all lead:

At the start of 2014, Greece is expected to return to the private capital markets to raise new money on its own account. If Greece could not borrow from the global capital markets on affordable terms this year, when its debt ratio was only 115% and its debt was only 270 billion euros, why on earth would the world want to lend it money in 2014 with a debt ratio of somewhere between 149% and 180%?